Yesterday, news flow from Spain was negative. Spanish bonds underperformed but the damage was limited to 10 bps spread widening at the 2-yr tenor, 7 bps for the 5-yr and 4 bps for the 10-yr. Several issues played a role. First of all, Catalonia’s president called snap elections (Nov 25), potentially opening the way to secession from Spain. “The hour has come to exercise our right to self rule”. Snap elections are necessary ahead of a referendum on independence as without a fresh mandate, they would be considered a fraud. Second, the region of Andalucia signaled it would apply for a €4.96B central government bailout. After Valencia, Murcia and Catalunia, it’s the 4th Spanish region to apply for help. Third, budget data showed that the central government budget deficit amounts to 4.77% of GDP from January to August, compared with 3.81% last year. The deteriorated figure was due to lower tax revenues (growth worries) and higher public spending. This adds to worries that Spain will largely overshoot this year’s 6.3% deficit target. Tomorrow, Spain presents the main details of the 2013 budget plan (Rajoy lifts a corner of the veil in the WSJ) and new economic overhauls. On Friday, they disclose the results of a in-depth audit of the banking sector to determine its capital needs.
Athens-based Skai.gr reported on its website that the IMF won’t agree to further aid payments to Greece before decisions are taken on a new debt restructuring. While we are rather reserved with the source, it is an item to keep an eye on. ECB Asmussen countered this proposal by repeating that the ECB won’t take losses on its Greek government bond holdings. Currently, the Troika are still in Greece for the latest review. Any decision should however only be expected mid-October the earliest.
Today, the eco calendar is thin with only the US new home sales and German CPI
inflation data on the agenda. Germany (Bund), Italy (BOT) and the US (5Yr Notes) will tap the market and Fed’s Evans, Bundesbank’s Weidmann and Spanish (1 1080
CZK, 0,00%) Rajoy are scheduled to speak.
In the US, the new home sales are expected to jump to a new cyclical high in August. An increase by 2.2% M/M to 380 000 is forecast, which would be the highest level since early 2010. The trend in the US housing market remains encouraging, as was suggested by NAHB homebuilders’ sentiment. We believe that the risks remain for a stronger outcome. In Germany, inflation is forecast to have slowed in September after an uptick in August. The consensus is looking for a drop from 2.2% Y/Y to 2.1% Y/Y. The regional indicators published this morning should provide us with further indications. We believe however that another upward surprise is not excluded. Nevertheless, core inflation should remain limited due to sluggish economic activity.